Inflation indexed bonds etf?

newguy05 · Mar 22, 2012

Like to get some feedback about long term investment in an inflation indexed bonds etf.

I have build up a decent amount in my company 401k, but it has very limited investment options - just a few etf index funds. One of them invests in inflation indexed bonds. With the assumption that inflation / interest rate will start to kick in within 5 years, is it a good idea to invest in this?

If the assumption is interest will go up, then one should not investment in us treasuries but on the flip side that also means inflation will be going up. So looking for some opinions on putting my money in this etf right now, looking to do about 20% allocation.

nazzdack · Mar 22, 2012

Quote from newguy05:
----inflation indexed bonds etf.
----With the assumption....
----If the assumption....
----but on the flip side....
----that also means....

1) Do you fully understand what can happen to that ETF during a deflationary spiral?

2) In order for "inflation" to occur, interest rates will probably have to rise a lot. Would you feel good to lose 25% or more of your money while others around you lose 30% or more of their money?

:eek:
3) This is another example of a product that was created AFTER the "need" for it had passed. :mad:

Martinghoul · Mar 22, 2012

Inflation-linked bonds are still bonds, so if interest rates rise, they will underperform. You need to be aware of this.

Bob111 · Mar 22, 2012

Quote from nazzdack:

1) Do you fully understand what can happen to that ETF during a deflationary spiral?
2) In order for "inflation" to occur, interest rates will probably have to rise a lot. Would you feel good to lose 25% or more of your money while others around you lose 30% or more of their money? :eek:
3) This is another example of a product that was created AFTER the "need" for it had passed.

i see no single sign of any deflation any time soon. with benny and barry in charge all i see is more printing,more debt,lower dollar and everything that comes with it. and similar ending ala greece or iceland

oldtime · Mar 22, 2012

I would not buy them in a ETF. There isn't that much money in them even if everything goes well. And then when you have to give up the little you make in management and expense fees, it isn't worth it.

The beauty of 401k and IRA's is you are protected from cap gains tax. So it makes more sense to invest more aggresively (high turnover) in tax sheltered accounts.

If I Bonds fit into your retirement plan, you would be better off just buying them outright with your personal money and holding them to maturity.

nazzdack · Mar 22, 2012

Quote from Bob111:
----i see....
----benny and barry....
----greece or iceland

1) You appear to be answering a question that you wish I would have asked. :eek:
2) Bob, do you fuly understand what can happen to that ETF during a deflationary spiral?

3) Did you compose your other response on a smartphone?

piezoe · Mar 22, 2012

Quote from nazzdack:

1) Do you fully understand what can happen to that ETF during a deflationary spiral?
2) In order for "inflation" to occur, interest rates will probably have to rise a lot. Would you feel good to lose 25% or more of your money while others around you lose 30% or more of their money? :eek:
3) This is another example of a product that was created AFTER the "need" for it had passed.

"deflationary spiral". ??? Surely you are joking.

http://www.bloomberg.com/news/2012-...ation-notes-at-record-low-negative-yield.html

newguy05 · Mar 23, 2012

Quote from Martinghoul:

Inflation-linked bonds are still bonds, so if interest rates rise, they will underperform. You need to be aware of this.

That was my main question, how it will perform when both interest rates & inflation are rising. Looks like the interest rate is still the main driver, i havent done the numbers but assume the bond price loss from interest rate will be higher than the principal + coupon gain from inflation.

There isnt much else to put the 401k in, sp500, some shitty managed equity funds, treasury etf or money market

Martinghoul · Mar 23, 2012

Quote from newguy05:
That was my main question, how it will perform when both interest rates & inflation are rising. Looks like the interest rate is still the main driver, i havent done the numbers but assume the bond price loss from interest rate will be higher than the principal + coupon gain from inflation.

There isnt much else to put the 401k in, sp500, some shitty managed equity funds, treasury etf or money market

It's governed by the concept of beta (not the same beta as equities, but similar idea)... Why don't you do some simple maths yourself? Look at the Fed H.15 historical data here: http://www.federalreserve.gov/releases/h15/data.htm

Look at the performance of, for example, the 10y TIPS vs the 10y nominal UST under different regimes. Specifically, if you think we're in for some relatively elevated "inflayshuns", you probably want to see what happened arnd 2006 - mid-2008. If you think we're in for another collapse, look at the late 2008 - 2009 period. To be sure, you will be only looking at the mark-to-mkt performance of the bonds and missing the carry, which is a rather significant component, especially for TIPS. However, it's a reasonable starting point, if you want to get an understanding.

newguy05 · Mar 23, 2012

Quote from Martinghoul:

It's governed by the concept of beta (not the same beta as equities, but similar idea)... Why don't you do some simple maths yourself? Look at the Fed H.15 historical data here: http://www.federalreserve.gov/releases/h15/data.htm

Look at the performance of, for example, the 10y TIPS vs the 10y nominal UST under different regimes. Specifically, if you think we're in for some relatively elevated "inflayshuns", you probably want to see what happened arnd 2006 - mid-2008. If you think we're in for another collapse, look at the late 2008 - 2009 period. To be sure, you will be only looking at the mark-to-mkt performance of the bonds and missing the carry, which is a rather significant component, especially for TIPS. However, it's a reasonable starting point, if you want to get an understanding.

thanks for the link, that answered my question then some, very helpful